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8.3.1 Alternative Sources of Funds
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8.3.1 Alternative Sources of Funds

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As China moves forward with its ambitious programs to expand coverage of sanitation throughout rural areas, a variety of funding sources will be employed to support these efforts. Although the Central Government is allocating substantial funds to the sanitation sector, additional funds will be needed in various locations to address the site-specific issues to improve sanitation. To support its efforts, the Central Government will be relying on local municipalities, counties, and villages to contribute finances. Households will also be expected to contribute monetary and/or non-monetary contributions to complete projects.

 

This section describes the alternative funding sources and mechanisms commonly used to finance sanitation projects. These funding sources apply to both capital expenditures (CAPEX) or operation expenditures (OPEX) related to on-site or off-site (centralized) sanitation facilities.

 

In general, there are three common funding sources for sanitation projects. Table 8.1 outlines these three sources and the financial mechanisms:

 

  • User or private funds,
  • Public funds from the government agencies, and
  • External funding sources from non-governmental organizations and philanthropic organizations.

 

Table 8.1. General Financing Sources for Sanitation Projects (Tremolet, 2007)

Sources of Funds

Type of financing mechanism using those funds

Users of the service (private)

  • For a decentralized/on-site system, the household invests to install the sanitation system and pays for the operation and maintenance of the system.
  • For a clustered or centralized system, the households pay the tariff to the service provider for connecting to the sewage system, and operation and maintenance of the wastewater system.

Public funds from the government agencies

  • Public subsidy for sanitation project design, construction and training.
  • Subsidized credits or loans to households for investment in on-site sanitation facilities.
  • Subsidized credits or loans to service providers.
  • Community-level rewards (e.g. grants to local governments or service providers).

External Sources (NGOs, INGOs, charities)

  • Grants or loans to central or local governments to match or merge with public funds for project planning, construction, and training.
  • Grants or loans directly to users or service providers
  • Subsidized credits to government, users or service providers.

 

There are debates as to what sources of finances should be used to cover the cost of different components of a project. Many government institutions and NGOs consider on-site (decentralized) sanitation facilities as home improvements and therefore investments should be financed by households. Nevertheless, the reality is that many households in rural areas do not have the financial resources to pay for sanitation facilities. The Central Government has taken the initiative to assure that publicly funded subsidies will be an important component of the financial strategy adopted in China. Given that sanitation is a public good (poor sanitation conditions impact public health, the environmental and economic development), subsidies or external funds are sometimes appropriate when needed to expand coverage. The common reason that sanitation needs to be subsidized is to make it affordable to the poorest households in a community.

 

Normally, financing options for rural sanitation projects include private or self-financing, a combination of private and public funds, and purely public funds. Evans et al. (2009) have prepared a summary of the various financing options for different rural sanitation options (decentralized and centralized systems) including the advantages and risks associated with each, as shown in Table 8.2 and Table 8.3.

 

Issues for consideration in financing rural on-site sanitation systems. In more traditional on-site sanitation systems, the capital costs are typically lower than a centralized wastewater system. Subsidies of these projects are often justified as a way to encourage demand for improved services. Another popular approach is to provide a revolving fund which theoretically allows poorer households to ‘borrow’ funds to construct a sanitation system and to pay the funds back over time, thereby enabling another household to benefit later. However, without a good peer support program, many revolving-fund-based projects have failed when the households have failed to repay the loan. A major problem with these approaches is related to targeting – it is often not the poorest and most disadvantaged that are able to access and/or make use of these funds. A second problem is that these programs may skew technology choices, encouraging households to build systems that may not be appropriate (i.e. installing pour flush latrines in communities that do not have piped water to the households).

 

Issues for consideration in financing centralized or off-site systems. Off-site systems usually consist of household connections to a sewer network and a wastewater treatment plant. The cost for connecting to the sewer is usually borne by the household or partially funded by the household and government. The costs for the sewer network and wastewater treatment plant are publicly funded recognizing that these improvements are for the public good. Two major problems have been common to this approach. First, the high cost of a connection often means that poor or unserved households are unable to access the publicly financed network service. The simplest mechanism to offset high initial connection costs is to amortize this cost through surcharges to the monthly sewer service bill. Another option is to establish a progressive connection fee based on income and allow for cross-subsidies so as to allow higher income households to assist poorer households to connect to the sewer.

 

The second problem is that the coverage of the sewer network may be limited by design, focused on the central portions of a community and not serving topographically low or poor districts on the fringe of a small town. Adopting small bore sewers and appropriately scaled and lower-cost solutions can be used to increase coverage of a rural community.

 

Table 8.2 Financing Options for Rural On-site Sanitation Facilities

(Evans et al., 2009)

Financing Mechanism

Advantages

Risks

Financing Source: Purely Private (Users of Service)

Self Financing: households invest in their own facilities

  • Majority of latrine projects in China funded this way
  • Responds to demand
  • Maximum leveraging of household resources
  • Maximum leveraging of market-based sources (if available)
  • Poor quality of construction
  • Does not fully consider environmental impacts
  • Suppliers may not be available/qualified
  • Unaffordable for the very poor
  • Households may not have access to sludge management services

Financing Source: Combination of Private and Public Funds

Support for software with low/no subsidy for hardware:
Support for project planning, engineering planning, training and health promotion, etc. 

  • Subsidy can be linked to outcome-based goal (i.e. number of latrines installed)
  • Focuses public funds on public benefits
  • Based at community level: can build community cohesiveness
  • May result in unaffordable sanitation for the very poor
  • Sustainability is a risk once initial attention and support is withdrawn

Micro-finance to households for sanitation improvements

  • Can be used to finance upfront costs
  • Demand for these funds may be low, and requiring promotion and/or marketing

Loans to small-scale providers

  • Lift constraints for small scale service providers to enter the market
  • Services may not reach the very poor
  • Demand for services may remain low

Non-financial support to small scale providers: training, product-development, business development services

  • Boost private sector
  • Service may not reach the very poor
  • Demand for services may remain low

Output-based aid: grants to households or communities or to small scale service providers based on successful construction and use of facilities

  • Subsidy linked to outputs – high level of accountability
  • Requires pre-financing which may not be available

Community cross-subsidies: users contribute to the most needy households in cash or kind

  • Removes affordability constraints for the poor
  • May result in unsustainable service for poor and less-able households

Partial infrastructure subsidy: users contribute in cash or kind

  • Enhances ownership of the facility
  • Improved affordability (removes access constraint)
  • May result in unaffordable sanitation for the very poor

FINANCING SOURCE: PURELY PUBLIC FUNDS

Full hardware subsidy (CAPEX – capital expenditures)

 

 

 

 

  • Removes affordability constraint
  • Can ignore or ‘crowd out’ households own investments
  • Facilities may not be used if there is not the demand for improved services
  • Results in unsustainable (too expensive) technology choices

 

Table 8.3 Financial Options for Centralized Village Wastewater Projects

Financing Mechanism

Advantages

Risks

Financing Source: Purely Private (Users of Service)

Self Financing: households invest in their own facilities

  • Responds to demand
  • Maximum leveraging of household resources
  • Maximum leveraging of market-based sources (if available)
  • Poor quality of construction and bad system planning
  • Does not fully consider environmental impacts
  • Unaffordable for the very poor
  • Only an option if networked sewers are available and close to household

Financing Source: Combination of Private and Public Funds

Support for software with low/no subsidy for hardware:
Support for project soft costs, planning, engineering, training and health promotion 

  • Subsidy can be linked to outcome based goal (i.e. number of houses connected to sewers)
  • Focuses public funds on public benefits
  • Based at community level: can build community cohesiveness
  • May result in unaffordable sanitation for the very poor
  • Sustainability is a risk once initial attention and support is withdrawn
  • Will have limited or no impact unless working sanitation system is available

Micro-finance to households for sanitation improvements

  • Can be used to finance upfront costs
  • Demand for these funds may be low requiring promotion and/or marketing
  • Will have limited or no impact unless working sanitation system is available

Loans to small-scale providers

  • Lift constraints for small scale service providers to enter the market
  • Can encourage service expansion into unserved areas (particularly into poor and or underserved areas)
  • Services may not reach the very poor
  • Demand for services may remain low
  • Can create tension or unintended competition with public or other private utilities
  • Lack of regulatory capacity or oversight

Non-financial support to small scale providers: training, product-development, business development services

  • Boost private sector (supply side options)
  • Encourages expansion or services to increase market
  • Service may not reach the very poor
  • Demand for services may remain low

Output-based aid: grants to households or communities or to small scale service providers based on successful construction and use of facilities

  • Subsidy linked to outputs – high level of accountability
  • Can increase the number of households connecting to the sewer system
  • Requires pre-financing which may not be available

Community cross-subsidies: connection charges paid for from general revenue of the service provider or local utility

  • Removes affordability constraints for the poor
  • Increases participation in the project
  • May result in unsustainable service for poor and less-able households
  • Funds availability may be constrained by political willingness to raise tariffs for wastewater management services
  • Some communities may be unwilling to give up ability to collect connection fees

Partial infrastructure subsidy: users contribute in cash or kind

  • Enhances ownership of the facility
  • Improved affordability (removes access constraint)
  • Increases participation in the project by reducing household costs
  • May result in unaffordable sanitation for the very poor

FINANCING SOURCE: PURELY PUBLIC FUNDS

Full hardware subsidy (CAPEX – capital expenditures)

  • Removes affordability constraint
  • Increase participation in the project by all economic sectors
  • Results in unsustainable (too expensive) technology choices
  • Rarely sustainable in the long run

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